Understanding PAYG Instalments
What are PAYG Instalments?
Pay As You Go (PAYG) instalments is a system for making regular payments towards your expected income tax liability. It generally only applies if you earn business and/or investment income outside of employment income, which results in tax payable on your most recent tax return.
Paying PAYG Instalments assists you in meeting your tax obligations by allowing you to make smaller payments each quarter in advance, rather than having to make one lump sum payment at year end, when you lodge your annual tax return.
All amounts paid in PAYG instalments through the year will become tax credits on your next tax return lodgement. If you haven’t paid enough tax through the year in your PAYG Instalments, then you will have to pay the balance owed, but if you have overpaid on your instalments, this will result in a credit and you may receive a refund.
The instalments are separate to Pay As You Go (PAYG) Withholding, which is the tax withheld by employers on wages and salaries. The PAYG Withholding tax is shown on your annual PAYG Summary from your employer.
Why have I been Registered for PAYG Instalments?
The ATO bases the requirement for PAYG instalments on your last lodged tax return. Generally, for individuals, if you reported more than $4,000 in business or investment income in your latest tax return and the tax payable on your last notice of assessment was greater than $1,000, you will be registered in the PAYG instalment system.
The ATO will notify you if this occurs, and the notification will include details on how often you will be required to pay and what the first instalment amount will be.
When are PAYG Instalments Issued?
PAYG instalments are generally issued and paid quarterly but you may also have the option of lodging an annual instalment or two instalments per year.
If you are already registered for GST the PAYG instalments will become part of your regular BAS lodgements.
How are PAYG Instalments Calculated?
Your PAYG instalment will be calculated based on the information lodged in your most recent tax return. The ATO takes the amount earned from business and investment income from your last lodged tax return, then adds on the expected growth based on GDP and issues the PAYG instalments based on the result.
On your first PAYG instalment issued for each financial year you will be able to choose between two options for calculating and paying your PAYG instalments – either by an instalment amount (option 1) or by an instalment rate (option 2).
The instalment amount or option 1 is a flat amount calculated by the ATO, based on your last lodged tax return. If you choose to pay your PAYG instalments using option 1 and have no other obligations that require a BAS you will not need to lodge each PAYG instalment form, you will just need to pay the amount shown on the notice by the due date.
Option 2 allows you to calculate your PAYG instalment based on your actual income for the instalment period multiplied by a rate set by the ATO. This will mean that your instalments are based on your income as you earn it, rather than a projection based on your last lodged tax return. Paying your instalments using option 2 means you will need to lodge the PAYG instalment form with the required information each quarter.
Can PAYG Instalments be Varied?
PAYG instalments can be varied up or down to suit your current income and cash flow situation, provided any variations are lodged before the instalment due date. The ATO discourages variations that result in a difference greater than 85% between what was paid in PAYG instalments through the year and the tax payable on your annual tax return.
This means that you should not vary each instalment down to zero through the year and then end up with a tax bill once you lodge your tax return. In these circumstances the ATO may impose a general interest charge.
How does your Tax Return impact your PAYG Instalment?
The timing of your annual tax return lodgement can impact the PAYG instalment amounts issued by the ATO. This is because the ATO bases their PAYG instalment calculation on the last known details, i.e. your last lodged tax return.
So, the earlier you lodge your tax return each year, the more accurate and up-to-date your PAYG instalments can be. As your business or investment income may increase from one year to the next, the ATO will be able to increase the next PAYG instalment issued, after you lodge these details in your annual tax return.
If the ATO receives this information early in the tax year, they can make any necessary adjustments on future PAYG instalments so that your tax instalment payments are still spread evenly through the year.
Disclaimer
This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.
